vesting % not following document

[Guest Jill B]

I searched the forum trying to find something regarding this topic and couldn't find anything, so here is my question.

I have a profit sharing plan which has a graded vesting schedule according to the plan document as

0%, 20%, 40%, 60%, 80%, 100%

But for the past three distributions, the participants were all vested at 100%.

Clearly the plan sponsor did not following the plan document. Can she retroactively amend to change the vesting schedule to 100%, since no benefit was taken away from the other participant's?

(any forfeiture would have gone toward the employer contribution).

And what if she wanted to keep the currect vesting schedule, would there even be a fix since none of the participants were affected? (They each have their own segregated accounts).

I looked at rev proc 2008-50 which explains how to fix vesting problems but this is only if the distribution gave too little! In this case the distributions were too much.

thanks for any thoughts on this.

[Tom Poje]

there are other factors that could trigger 100%vesting

partial termination

normal retirement

possibly early retirement...

[Guest Jill B]

there are other factors that could trigger 100%vesting

partial termination

normal retirement

possibly early retirement...

Yes, but these were terminations.

[Mike Preston]

Kind of depends on the numbers and body counts involved. If your last response is a thoughtful one and not just a knee-jerk response (that is, that you have actually analyzed the terminations and you are convinced nobody could legitimately consider the circumstances to be a partial termination), then the plan sponsor has a choice: either make the plan whole (by either attempting to get repayments from the overpaid or ponying up the money without going through the hassle) or by amending the plan to conform to the actual administration. If the intent is to conform the plan to its operation an amendment and submission is required. If the plan sponsor wants to fix it without an amendment, at issue is whether the problem is deemed to be insignificant or not (that depends on the numbers and body counts). If not, then a filing under EPCRS is required to fix the plan.

Sounds like the best place to start with be with ERISA counsel.

After re-reading your message, I'm not entirely sure when the last three distributions took place. If you are saying that the last three distribution CYCLES have treated everybody as 100% vested when they shouldn't have been, then you are beyond the two year rule. If all three of what you are referring to were individual distributions that took place within the last year or two, you can correct even significant operational violations without a submission.

Lots of facts to pin down.

[Guest Jill B]

Kind of depends on the numbers and body counts involved. If your last response is a thoughtful one and not just a knee-jerk response (that is, that you have actually analyzed the terminations and you are convinced nobody could legitimately consider the circumstances to be a partial termination), then the plan sponsor has a choice: either make the plan whole (by either attempting to get repayments from the overpaid or ponying up the money without going through the hassle) or by amending the plan to conform to the actual administration. If the intent is to conform the plan to its operation an amendment and submission is required. If the plan sponsor wants to fix it without an amendment, at issue is whether the problem is deemed to be insignificant or not (that depends on the numbers and body counts). If not, then a filing under EPCRS is required to fix the plan.

Sounds like the best place to start with be with ERISA counsel.

After re-reading your message, I'm not entirely sure when the last three distributions took place. If you are saying that the last three distribution CYCLES have treated everybody as 100% vested when they shouldn't have been, then you are beyond the two year rule. If all three of what you are referring to were individual distributions that took place within the last year or two, you can correct even significant operational violations without a submission.

Lots of facts to pin down.

No, this wasn't a knee jerk response! ) I did go back and look at each distribution. The first one was done in 2007, and luckily done correctly. She was 100% vested anyway. The second distribution was done in 2007 for a participant who was hired on 7/23/2001 and terminated on 7/18/06. No hours were documented, so 1,000 was assumed, which I question. She was paid out 100% vested.

The third participant was paid in 2008. She was hired on 6/6/2003 and termed on 5/10/06. Again, no hours were documented. She was hired back on 5/7/2008 but only worked until 7/1/2008 with 167.75 hours. She was paid out 100% vested.

[david rigby]

The third participant was paid in 2008. She was hired on 6/6/2003 and termed on 5/10/06. Again, no hours were documented. She was hired back on 5/7/2008 but only worked until 7/1/2008 with 167.75 hours. She was paid out 100% vested.

Unless age 65, this could be a failure to follow the plan document.

Not ususally a good reason to do it incorrectly in the future.

[Guest Jill B]

The third participant was paid in 2008. She was hired on 6/6/2003 and termed on 5/10/06. Again, no hours were documented. She was hired back on 5/7/2008 but only worked until 7/1/2008 with 167.75 hours. She was paid out 100% vested.

Unless age 65, this could be a failure to follow the plan document.

Not ususally a good reason to do it incorrectly in the future.

I agree. I need to know if the plan sponsor can correct with an amendment to change vesting to 100%. I believe she can but I will do more research.

[Mike Preston]

I don't know how you can state that nothing was taken from the other participants if you indicated that forfeitures are added to employer contributions?

I am not in favor of amending the plan (which requires submission). It would seem far easier to just treat it as a mistaken distribution to some extent and make the plan whole. You may have an allocation to re-run, though, to allocate the forfeiture properly.

More issues: as to the first, does the plan use the DOL hours equivalency? If so, that person looks 100% vested to me. As to the third, does the plan use elapsed time? Is the drafting so sloppy that said third person was considered as working for 6 full years?

[Guest Brian Theismann]

I looked at rev proc 2008-50 which explains how to fix vesting problems but this is only if the distribution gave too little! In this case the distributions were too much.

Are you sure that the distributions were from discretionary profit-sharing contribution accounts? What were the amounts of the excessive payments?

The IRS position, as I understand it as a revenue agent specializing in employee plans, is that paying too much to a participant in a profit-sharing plan is generally not considered discriminatory because it is assumed that the employer would have contributed less to the plan had the vesting computations been done correctly. I question that point of view in some cases, but Revenue Procedure does take that position, at least with respect to excessive allocations. I would only worry about the situation if the recipients were HCEs. Even then, I doubt the IRS would pursue disqualification unless the amounts were substantial and there was a clear reduction in benefits to NHCEs.

SCP cannot be used to conform the plan document to prior operations in this situation. See Section 4.05(2) and note the reference to Section 2.07 of Appendix B.

http://www.irs.gov/irb/2008-35_IRB/ar10.html#d0e951

VCP could be considered, but if the failure clearly resulted in reduced benefits to HCEs- or any participant, for that matter- an amendment would presumably violate 411(d)(6). Remember, too, that VCP is not without cost.

I suppose the sponsor could reimburse the plan under SCP. However, if it can reduce its future discretionary contributions by an equal amount, the reimbursement would only make a difference if the allocations would be significantly different between the year of the error and the current year. In other words, if the participant base was significantly different back then or the relative compensation levels were much different, the allocation of a corrective contribution could be significantly different from that of a current-year contribution. An insignificant SCP can be done at any time. A significant SCP must be done within two years. So for the second of the three distributions, it sounds like VCP is your only option.

My sense is that the sponsor probably has nothing to worry about, but I would be interested in hearing the answers to my questions. Maybe I could ask my colleagues in Ohio what they think their manager would rule regarding such an issue.

[Guest Jill B]

My thought is that I can go through Self correction of insignificant operational failure. I think this will simply consist of putting procedures in place so that, in the future, this operational failure does not happen again. This will be documented along with the discovery of the operational failure and what steps were taken to prevent it in the future.

Other plan participants were not affected, since they still received that same amount of contribution just that the employer didn't have forfeitures to net against the contribution amount.

All participants that were distributed out were distributed at 100%, so at least the operational failure was consistant!

Now, the plan sponsor would like to go back to the 6-year graded schedule for all new participants, which I think they can do.